Product liability insurance covers a business’s responsibility for the products it makes or sells. If a product causes harm, product liability pays the injured party’s medical or repair bills as well as the business’s legal fees. The cost of product liability insurance depends on your risk, but premiums generally run between 15 cents and $1.50 per $100 of annual sales revenue.
Many small businesses need some product liability coverage, which is why it’s included in standard general liability insurance. Others, however, may need a standalone policy. That makes working with an insurer like The Hartford a good idea. The Hartford’s team of small business insurance specialists can evaluate your risk and point you towards the appropriate coverage for your business.
How Product Liability Insurance Works
Any business involved in bringing products to consumers can be held responsible if its products cause bodily harm or property damage. Product liability insurance protects these businesses by covering claims associated with product defects, malfunctions, or insufficient warning labels and instructions. Policies typically pay:
- Your attorney’s bills
- The injured party’s medical bills or repair costs
- Judgments against your business or settlements made to avoid court
General liability includes products-completed operations coverage, but a business with greater risk, like a manufacturer, may want a standalone policy.
Claims-made vs Occurrence Product Liability Insurance
Product liability can be written on a claims-made or an occurrence basis. Claims-made policies only pay if both the triggering event and the claim filing happens while the policy is in force. Most claims-made policies include prior acts coverage for triggering events that occur before the policy starts. Without this coverage, events that cause damage before you buy your policy would be denied, even if you only learn about them during the life of the policy.
The second option is an occurrence policy that pays any covered claim as long as the triggering event occurs during the life of the policy. As a result, occurrence policies tend to be more expensive than claims-made policies because the insurer has to pay claims even after the policy has ended.
What Product Liability Insurance Covers
Business owners are liable for injury, illness, and property damage caused by the products or services they bring to consumers. In most states, any business in the supply chain can be held responsible for the harm its goods or services cause. That means retailers, designers, wholesalers, manufacturers, and distributors can all be sued for:
- Design defects: When the initial design causes an entire product line to be inherently dangerous, like a top-heavy car that consistently flips over on turns
- Manufacturing flaws: When a flaw in production creates a defect in a product that then causes injury or damage; an example might be a swing set with a loose or weakened chain
- Defective instructions or warnings: When inadequate or unclear instructions cause an injury, such as a cleaning solution that emits chemical fumes and does not give directions to use in a ventilated area
Policies can also cover completed business operations that occur off-premises. For example, if a carpenter finishes hanging kitchen cabinets that later fall and cause damage, product liability insurance typically pays for the repairs.
What Product Liability Insurance Does Not Cover
Compared to other insurance policies, product liability has more exclusions, creating more reasons for a carrier to deny a claim or choose not to renew your policy. Five common exclusions specific to product liability insurance include:
- Quality control exclusion: Product liability insurance carriers require that manufacturers and distributors maintain quality control standards to ensure products are safe for consumers
- Reporting exclusion: Failure to report new manufacturing methods, products, materials, or ingredients can mean your policy doesn’t cover your product
- Efficacy exclusion: Your insurer may deny a claim if your product fails to perform its main function
- Material exclusions: Many carriers do not cover certain materials or ingredients; selling or manufacturing a product that contains a forbidden material or ingredient means your policy doesn’t cover it
- Product recalls: Most product liability policies don’t cover costs associated with the withdrawal, inspection, repair, replacement, or loss of use of an insured’s product if it’s recalled
You want to always talk to your carrier when you add products or change production methods, materials, or designs on current products. Doing so can save you a lot of headaches should you be hit with a product liability lawsuit.
Product Recall vs Product Liability Insurance
Business owners sometimes assume their product liability insurance pays for getting defective products off of shelves and out of consumers’ hands. Unfortunately, recalls are usually excluded from coverage and require product recall insurance. A product recall policy generally covers the business’ financial loss when recalling products, such as:
- Reimbursement payments
- Shipping costs
- Product testing
- Customer notification
- Employee overtime
A company working in an industry where product recalls could affect millions of people―safety products, electronics, or food items―should consider getting product recall coverage in addition to product liability insurance.
Who Product Liability Insurance Is Right For
Product liability insurance is a must for anyone who manufactures, distributes, designs, or sells products. If there’s potential for a member of the general public to link what you sold to injuries or damages they sustain, you’re at risk for a claim. Essentially, everyone in the supply chain needs product liability insurance. That includes:
- Wholesale distributors
- White label resellers who repackage other products under their own brand name
- Retailers and distributors selling products to the general public
- Ecommerce business owners and drop shippers
Vendor Coverage Rider for Retail Product Liability
Instead of buying a standalone product liability policy, retailers may want to ask whether distributors or manufacturers of the products they sell offer vendor coverage. Vendor coverage is an endorsement to the manufacturer’s or distributor’s policy that extends coverage down the supply chain to retail sellers. A retailer who wants to take advantage of this rider should request a certificate of insurance (COI) as proof that the other business owner has product liability insurance. Not all suppliers offer it.
Product Liability Insurance Costs
The average cost of product liability insurance is 25 cents per $100 in sales revenue. However, in most cases, the minimum cost of product liability insurance is about $2,500 per year. For riskier products like medical devices, the costs likely won’t fall below $7,000 per year.
For example, if you sell $1 million worth of goods per year, your product liability insurance costs might be $2,500 (or 0.0025 x $1 million / $100). If you are in a riskier industry like biotech, then you can expect to pay closer to $10,000 per $1 million in sales (or 0.01 x $1 million / $100). Of course, your actual costs may vary depending on the type of product.
Product Liability Insurance Costs Factors
The cost of product liability insurance varies greatly depending on the risk categorization of your product. These can depend on the size of your product, how it’s marketed, its safety features, and the size of your distribution. Items like fireworks and firearms will have a higher risk factor than fuzzy slippers and yoga mats.
Other factors that determine product liability insurance cost include:
- Industries: Not only are some products riskier than others, but certain industries face high standards and more lawsuits than others, so they often pay higher product liability premiums
- Location: Carriers price insurance based on state insurance regulations and typical loss exposure
- Company revenue: Annual revenue defines the overall liability lawsuit exposure a company faces and impacts the amounts awarded by courts
- Claim history: A company or product with a history of claims generally indicates a greater risk for the insurer
- Coverage limits: Policies start with limits as low as $100,000 but can exceed tens of millions of dollars for protection; higher coverage means more exposure for the insurer, so premiums are higher
The Cost of Not Getting Product Liability Insurance
Businesses that need standalone product liability insurance may balk at the extra expense. Before they decide to forgo the coverage, however, they might want to consider what they could pay if they were hit with a product liability lawsuit. The chart below uses the most recent data from the Insurance Information Institute to compare jury awards in product liability cases to those in general liability and medical malpractice suits.
Top Product Liability Insurance Providers
Companies seeking a bundled policy that can cover product liability claims retroactively
Young small businesses with new products and no history of liability exposure
Retailers and manufacturers of cannabis-based products
Businesses looking for product liability and product recall insurance
Vendor, exhibitors, and concessionaires who need short-term coverage
Small business owners with low product liability risk, like many retailers, should look to top insurance providers who offer comprehensive general liability policies and business owner’s policies (BOPs). However, manufacturers and designers may need to work with surplus lines brokers to get a standalone product liability policy, especially if the products they work with pose great risks, such as firearms and consumable goods.
The Hartford is a good fit for small business owners whose risks can be sufficiently covered with the products-completed operations coverage found in a business owner’s policy (BOP). The Hartford’s can be written on a claims-made basis with prior acts endorsements to cover incidents occurring before the policy’s start date while still being some of the most competitively priced BOPs on the market. Its minimum annual premium is $250, or slightly more than $20 per month.
As an online insurance broker, CoverWallet works with top-rated carriers and is a great fit for new businesses that have no previous product liability exposure. These policies tend to be more expensive, and CoverWallet can shop these policies among multiple top providers to find the best price for new companies that don’t yet have a track record of product sales. Additionally, the company has an easy application that simplifies and speeds up the entire insurance purchasing process.
Insurance Canopy is a specialty insurance provider that can place difficult-to-insure businesses, particularly cannabis industry companies that have significant exposure from the sale or manufacturing or hemp-based and cannabidiol (CBD) items, including ingestible and topical products. Business owners can add product liability riders to policies or purchase standalone policies on a claims-made or occurrence basis.
AIG is a good choice for businesses that face a high likelihood of product recalls like those involved with child safety products, lithium-ion batteries, auto parts, or vitamin supplements. The company offers product liability and contaminated product insurance as well as a product recall policy that can cover your business’s responsibility to third parties.
Nationwide is a good fit for vendors, concessionaires, and exhibitors who aren’t involved in manufacturing the products it sells. These often have some protection through the product liability insurance found higher up in the supply chain but still need to cover themselves from being attached to lawsuits. Nationwide works with specialty carrier K&K Insurance to bring vendors short-term general liability with product liability coverage that doesn’t limit the number of events you can attend.
Product Liability Insurance Frequently Asked Questions (FAQs)
Our goal is to help you decide if you need product liability insurance. To do that, we’ve answered some of the most commonly asked questions about the coverage here.
Is product liability insurance included in general liability?
In most cases, small business owners get sufficient product liability coverage in their general liability policies. For larger manufacturers with very high exposure rates, standalone policies are available through surplus or specialty brokers.
What is the retroactive date on a claims-made policy?
Claims-made policies typically provide coverage for claims that occur before the policy’s start date. A retroactive date shows how far back the insurer provides coverage. Some claims-made policies, however, have full prior acts coverage and pay claims on any event that happens before the policy starts. Your retroactive date should be listed on your policy’s declarations page.
What is the extended reporting period?
Extended reporting periods, or reporting period extensions, are features of claims-made insurance policies. Most product liability policies written on a claims-made basis have a basic extended reporting period that covers losses occurring while the policy was in force but reported after the policy was canceled.
Product liability insurance offers important liability protection if your business manufactures, distributes, sells, or repairs products. Product insurance protects against claims and lawsuits where judgments can be in the millions. Protect your business against the expense of defending claims if a product malfunctions or has a design flaw.
One product liability claim can bankrupt a company that isn’t prepared with product liability insurance. It is easy to get a quote that covers liability before you realized you needed it with The Hartford. Visit The Hartford to see how it can cover your business and get a quote in just 20 minutes.